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When asked to provide a definition of the word ‘catastrophe,’ people in the year 2005 could be expected to point a finger in the general direction of New Orleans and the Gulf Coast without hesitation. They would, of course, be correct. However, most people may not be aware that there exists an actual, operational definition of what constitutes a catastrophe – and it’s not just a big dollar amount. The definers of the term catastrophe may be found at Property Claims Services (PCS), a division of the Insurance Services Office (ISO). PCS was founded during the post-war housing boom of the 1940s – 1949 to be exact. “After World War II, the post-war housing boom caused an explosion in demand for homeowners insurance,” explained Gary Kerney, assistant vice president, PCS. “Consumers began asking the insurance industry for package policies in such numbers that the industry was not sure what to charge for them.” In addition, given the increasing scale and concentration of insured exposures, such as the huge housing tracts of the 1950s and later, insurers were becoming increasingly exposed to the potential for mass claims in the wake of catastrophes. It soon became clear that there was a need for a central clearinghouse to track the nature, characteristics and costs of major events and to help gather the data that would become the framework of a catastrophe management system. Enter PCS, which has been providing that assistance to business and government for more than 50 years, including an unambiguous definition of what is and is not a catastrophe.
Defining catastrophesAccording to PCS, the characteristics that make an event a ‘catastrophe’ are relatively simple. First, there must be at least $25 million in insured property losses. Second, the event must affect a significant number of policyholders and insurers. By that measure, virtually any hurricane of sufficient force coming ashore in a developed area may be defined as a catastrophe, affecting thousands of policyholders and scores of insurance carriers. By contrast, while a brush fire in the Los Angeles area could easily rack up more than $25 million in claims with the destruction of high-valued properties, the relatively limited number of claimants and carriers would not constitute a ‘catastrophe’ under the PCS definition. “Obviously, for the last couple of years, our focus has been on hurricanes,” said Kerney. “Last year (2004) was unprecedented, with four hurricanes striking Florida within a six-week period … but then came 2005, with more hurricanes and even greater severity.” To aid claims information tracking, every designated catastrophe is assigned dates, causes and serial numbers. The assignment of numbers to catastrophe events aids in the quick and accurate classification of the ultimate costs and claims payments logged for future reference. The information gathering process can go on for years. “We are still not done with the 9/11 World Trade Center catastrophe,” said Kerney. “The event is still undergoing a re-survey process that will continue for some time, which also happens with other catastrophes. That’s why we usually refer to dollar amounts only as estimates.” On occasions when PCS data has been compared with official Department of Insurance data in the states where catastrophes have occurred, the numbers are always remarkably close. 2005 hurricane estimates remain in flux In modern times, the smallest catastrophes tend to start in the $100 million range, well above the $25 million threshold. All catastrophes are booked in ‘nominal dollars,’ meaning real dollars at the time the events occur, not recalculated in present dollars. While catastrophes share many of the same characteristics in terms of damage and human suffering, each has its own individual personality. “In the case of Katrina, the big question is wind versus water,” Kerney said. “Clearly, much of the damage and dislocation came in the wake of the storm when the levees broke. It’s going to take some time to sort out what’s covered and what isn’t.” Recovery depends on private insurersHowever long it takes, the process of recovery will depend largely on the response and involvement of private insurers, as it usually does. “Eighty percent of the recovery following a catastrophe is thanks to insurers,” said Kerney. “If it were not for the actions of private insurers, there would be no recovery. The most that a victim can get from FEMA (Federal Emergency Management Agency) is $25,000, and that includes a $3,500 death benefit that you can only qualify for if you die. In this and future catastrophes, the insurance industry will continue to be one of the major players in the recovery process.” And PCS will remain one of the key players in the collection and analysis of critical catastrophe data in what seems to be an ever more dangerous and unsettled world. CONTACT INFO
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